What Listed Markets Might Be Signaling for Private Real Estate

If you are an investor in private real estate, you might be wondering when the downturn in the market will bottom out. After a strong post-COVID bounce back, a rapid increase in interest rates has put a damper on performance and returns have turned negative in most major markets. Asset values in the MSCI Global Quarterly Property Index fell 7.3% between their peak in June 2022 and September 2023, and global transaction volume in the third quarter of 2023 fell 41% year on year.

By contrast, markets for listed real estate closed out 2023 on a much more positive note, but is this a good omen for private markets? Making direct comparisons between listed and private real estate can be tricky, as there are several notable differences between private-market and REIT indexes, including the presence of substantial leverage in the latter. The MSCI Liquid Real Estate Indexes may help to provide a less distorted view, as they are public-market indexes but control for leverage.

A leading indicator for private real estate?

As shown in the charts below, both the MSCI UK IMI Liquid Real Estate Index and the MSCI USA IMI Liquid Real Estate Index spent much of 2022 and 2023 posting negative total returns but finished 2023 with year-on-year total returns of 7.5% and 8.5%, respectively. The liquid indexes are more volatile than the appraisal-based direct indexes and do not control for underlying property differences; however, over the last 20 years, the performance of the liquid indexes has generally served as a leading indicator for direct real-estate markets.

Does the recent improvement in public-market performance mean that private real estate will turn the corner soon? If you believe that public-market pricing will lead private, you may harbor some optimism for private markets in 2024.